Will Christmas come early with the mid-term elections?
Abraham George Macro Musings
After suggesting that inflation is transitory for the most part of last year, the Fed Chairman Jerome Powell announced a 75 basis point rate hike for the fourth time in a row taking the Fed funds rate to 4%. The move didn’t come as much of a surprise. It’s what was most expected.
My question is how did the Fed get it so wrong and where is the accountability? Why can’t they be a little more honest? The ironic thing is with all this the Fed still wants to project that there won’t be a recession or they have redefined what a recession is. How convenient!
There was some respite from Powell. He seemed to indicate that more factors would be taken into consideration concerning future hikes. The language was a bit softer compared to many other times this year but it was still combative.
It may not be another 75 basis points but 50 basis points are very likely for December and even late January. So we can think of considering a pause at a 5% Fed Funds rate. The hard facts are that inflation is running rampant due to the combination of past poor monetary policies and bad economic policies. Therefore we all have to pay the price.
After the FOMC, the emotional breakdown caused equities to crater by about 2.5% but largely recovered part of it on Friday. This ongoing volatility will continue especially in growth stocks given the current environment. Since 2009, we have seen the worst downside volatility this year. It was the 54th decline of more than 1% this year.
Share prices are supposed to be ultimately based on earnings growth, and earnings are based on many other fundamental factors mainly the health of the economy. But that’s not the case now. We are in a situation where bad economic news is considered good for stocks and good news is bad for stocks. So it is very difficult to make intelligent informed beliefs on the markets with good conviction.
Having said that think bonds are entering a period of good value. While bond prices drop in a rising interest rate environment, bond yields have been increasing. The long end of the curve has been flattening. Historically bond yields tend to peak before the final rate hike in a hiking cycle. So think there is good value in buying bonds.
Nevertheless, I read a lot of negative reports from many experienced analysts and fund managers in the markets on equities. Those have increased sharply in the last ten days. I think I am a contrarian in this current environment and we may have seen the worst for the markets on Oct 13th.
Until a few weeks back the projections for the midterm US elections were a toss-up but now it looks like it is swinging vigorously in favor of the Republicans. Considering what happened with the Trump elections and the Brexit one cannot fully depend on these opinion polls. So we should have those results in a few days.
But here are some statistics worth considering. Going back to 1962 the S&P 500 in the 12 -months following a midterm election had an average return of 16 %. That’s double the long-term average return. Over these 15 data points spanning a period of 60 years all had a positive stock market performance for the 12-month period following the midterm election. So there is hope to be optimistic about the markets.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.